Question: Firm A can borrow at 2% fixed or at Libor minus 50 bps in the fixed and floating rate markets, respectively. Firm B can
Firm A can borrow at 2% fixed or at Libor minus 50 bps in the fixed and floating rate markets, respectively. Firm B can borrow at 5% fixed or Libor flat in the fixed and floating rate markets, respectively. A wants to borrow floating and B wants to borrow fixed. If A borrows fixed and B borrows floating and they enter into a fixed-for-Libor interest-rate swap in which A pays Libor flat, what is the range of fixed rates for B that enables each firm to improve its financing costs (compared to accessing financing in the market directly)? 2.5%-5% 2.5%-4.5% 1.5%-4.5% 2%-5%
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